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2016-03-08 21:04:13

Jingle Mail – All the Way to the Bank

Jingle mail is the act of walking away from an underwater mortgage by “mailing your keys back to the bank” and is a peculiarity of the Alberta residential market and an act of desperation. However, a combination of high debt and lost jobs make it an option in a province going through a significant economic reckoning. It's enough of a concern that the new Liberal Federal Government is watching the Alberta market closely.

Jingle mail, or strategic defaults, weaken the housing market and increase loan losses among Canada's banks. When you see high-end home prices drop 20% below the peak, there are going to be people who considering walking away. But it is not only high end homes with large mortgages in places like Calgary and Edmonton; it is happening in rural communities like Grande Prairie and South of Calgary areas also.

Why Alberta is different? Alberta is the only Canadian province to broadly offer non-recourse residential mortgages. These are loans with at minimum, a 20% down payment and they are not insured by the Canada Mortgage and Housing Corporation (CMHC). If you walk away, you lose your home, but otherwise have no personal liability. Elsewhere in Canada, your lender can take you to court and seize other assets, such as RRSPs, vehicles, and even garnishee your wages.

Jingle mail was an enormous problem in Alberta in the 1980’s, when mortgage rates were hovering around 20 % and people began leaving the province to find work elsewhere. It made a rough housing market even worse when banks were forced to sell off abandoned homes at a discount. Alberta's housing market is also being watched closely by the federal government. In the spring and fall of 2015, the Department of Finance commissioned two reports on the state of the housing market in Alberta. According to the CBC who received the reports, the analysis of the housing market showed that between 2001 and 2011, there was overbuilding in Alberta, resulting in too much housing stock on the market. However, as people continued to move to Alberta from other provinces, much of the excess supply was bought up.

In the mid-eighties, around a half million people left Alberta to find work in other parts of the country and were able to walk away from their mortgages with virtually no personal consequences, not even to their credit rating. That's the scenario that the current Finance Department is worried about now. "These non-recourse mortgages could create incentives for some homeowners facing an income shock to pursue a strategic default and thus place further downward pressure on prices," read one of the reports obtained by CBC News. So far... it’s a problem in parts of Alberta where prices have dropped 20 % or more. Fort McMurray and the luxury housing market in Calgary have both seen prices drop that much from the highs of 2014.

There are also many luxury homes sitting vacant, carrying mortgages in excess of $2 million. Goodbye credit rating The one main difference between now and the 1980's is that now credit bureaus have access to mortgage information. If you make a strategic default, it will follow you. Just handing the keys back and saying, “I'm going to move to BC or Saskatchewan where the jobs are,” and think that you're going to start your life up again and borrow more money simply it isn't going to happen. You're going to have a big black mark on your credit bureau for the next six to seven years.